China Stocks Edge Higher as Selloff Over Curbs Seen as Excessive

  • Auto, utility shares advance as small-cap gauge extends losses
  • Sentiment fragile as market expects more curbs: Core-Pacific

Chinese stocks staged an afternoon recovery to edge higher amid speculation a selloff that sent the benchmark equity gauge to its steepest loss in six weeks was excessive. Automobile and utility companies led gains.

The Shanghai Composite Index rose 0.1 percent at the close, after dropping as much as 0.8 percent. SAIC Motor Corp. climbed for a third day to pace carmakers higher, while China Yangtze Power Co. gained to the highest level this year.

The advance comes after stocks sank Wednesday on concern regulators will restrict investments in equities. The China Banking Regulatory Commission is said to be planning a crackdown on the $3.5 trillion wealth management product market. The initial draft states that cash from “mass market” wealth products can only be invested in money or bond markets, and not in domestically listed shares, said a person with direct knowledge of the matter.

“The panic selling yesterday was overdone,” Ronald Wan, chief executive at Partners Capital International Ltd. in Hong Kong. “Curbs on wealth management products have been there for a while, even though further tightening will slow fund flow into stocks.”

The Shanghai equity gauge rose to 2,994.32. The ChiNext Index of smaller companies fell 0.7 percent to a one-month low, after sliding as much as 2.1 percent during the session. The Hang Seng China Enterprises Index of mainland companies in Hong Kong slipped 0.4 percent, while the benchmark Hang Seng Index retreated 0.2 percent.

Leverage Curbs

China’s securities regulator has already restricted the use of leverage by structured asset management plans, and was said to warn brokerages to do better due diligence when raising money for companies. The Shenzhen Stock Exchange will demand improved disclosure and limit speculation on stocks in popular industries such as virtual reality and artificial intelligence, according to a statement in the Securities Daily Tuesday.

Authorities including the CBRC have noticed that bursting of bubbles in the property, securities investment and commodity sectors may worsen bad loans and even affect the stability of the banking system, the 21st Century Business Herald reported, citing a person close to regulators.

China has been tightening rules on WMPs since late 2014. The products are a key reason behind the growth in the shadow-banking industry, which Moody’s Investors Service estimates is worth more than 50 trillion yuan ($7.5 trillion), and have been used by some financial institutions as a way to extend funds to risky borrowers and evade capital requirements. WMPs are sold by banks but often stay off their balance sheets.

Market Sentiment

SAIC Motor climbed 2.1 percent and Great Wall Motor Co. jumped to six-month high, ranking among the Shanghai gauge’s biggest drivers by points. China Yangtze rose 1.8 percent, capping a fourth day of advances.

Shanghai New Culture Media Group Co. dropped by the 10 percent limit on the ChiNext index, the most since August. China Life Insurance Co. and Ping An Insurance Group Co. of China slipped at least 1 percent in Shanghai after the industry regulator said local insurers’ profits fell more than 54 percent in the first half because of a stock market decline and higher expenses.

“Sentiment remains fragile as the market awaits more regulatory measures on WMPs,” said Castor Pang, head of research at Core-Pacific Yamaichi Hong Kong. “Investors need to sell before deleveraging takes place to affect the stock market. ChiNext shares are vulnerable as WMPs invest in some of high-risk high-return assets.”

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